(Originally posted on National Review Online) Earlier today, Matt Yglesias tweeted on a subject of particular interest to me:
Crazy growth in the household survey makes me wonder if we’re seeing a web-driven boom in self-employment. The @etsy/@kickstarter recovery.
That is, as Justin Wolfers observes, there is a gap between the employment numbers from the payroll survey and the household survey, the latter of which suggests a healthier employment recovery than the former. By invoking Etsy, a marketplace for handmade goods, and Kickstarter, the crowdfunding platform for creative projects that, amazingly and awesomely, seems to have generated more funding for the arts last year than the National Endowment for the Arts, Matt is suggesting that because web-based business models have lowered the barriers to self-employment, we might be seeing more self-employment now and perhaps more self-employment in the future.
(Note: Matt was offering a casual observation/speculation regarding the future employment trajectory. Wolfers, etc., note that self-employment is not driving the improved employment numbers in the household survey. So please note that this post offers speculation about a possible future.)
I’ve been arguing that we’re going to see an increase in the self-employed share of the U.S. workforce, but for a somewhat less benign reason. I agree that the lowering of barriers to self-employment is an important part of the story. I also suspect, however, that the raising of barriers to employing other people is also an important part of the story. What if high self-employment numbers are just an example of regulatory arbitrage? OSHA violations in your own apartment or house are, after all, a lot easier to get away with than if you’re employing dozens or hundreds of people.
If full-time employees receive generous — and expensive — social protections, wouldn’t it make sense to hire more contract laborers, i.e., self-employed independent contractors? It’s certainly true that some benefits are disconnected from one’s employer (e.g., healthcare coverage), yet a variety of other regulations make it exceedingly difficult to hire and fire employers, hence the advent of “Génération Précaire.”
Paul Krugman acknowledged this possibility back in 2009 in a different context:
Another possibility, more favorable to the United States, is that in some European countries (Italy comes to mind) firms stay small to escape onerous regulations.
Carl Schramm of the Kauffman Foundation has invoked the phenomenon of “jobless entrepreneurship“:
“Since it began, the recession has triggered annual declines in the rate of employer enterprise births,” said Carl Schramm, president and CEO of the Kauffman Foundation. “Far too many founders are choosing jobless entrepreneurship, preferring to remain self-employed or to avoid assuming the economic responsibility of hiring employees. This trend, if it continues, could have both short- and long-term impacts on economic growth and job creation.”
As Daniel Isenberg and Tino Sanandaji, among others, have observed, there is a significant difference between high aspiration entrepreneurs, who according to Isenberg “need customers, risk capital, less red-tape, government non-interference, and global access,” and the self-employed, who in his view “require bank credit and micro-loans, skills training, stricter regulation in many cases, and heavier overall government support.”
One gets the strong impression that, as Sanandaji argues, high levels of self-employment are an artifact of high transaction costs and low institutional quality. Moreover, self-employment can be a vehicle for tax evasion, as we’ve seen in Greece and indeed across the market democracies.
The most elegant explanation of the underlying dynamic is Eli Dourado’s take on “technologies of control and resistance” (previous discussions here and here):
The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.
On the other side of the labor market, I wonder if post-materialism is not also part of an attempt to evade control. A lot of talented people are scaling back their labor efforts, and while surely not all of this is due to taxes and regulations, some of it may be. And other innovations which seem truly new, such as the development of autonomous vehicles, are the result of control of which we may not even be aware; for instance, how profitable would it be to develop autonomous vehicles if Pareto-improving trade with immigrant drivers were not made impossible by immigration and labor restrictions?
Eli goes on to discuss the Internet in detail, and he adds the following very insightful observation:
In a strange way, this theory is a partial vindication of Ayn Rand; the only problem is that she was too literal. The productive people do not go on strike when they are over-controlled. Instead, they innovate around the points of control. They go on strike at the margin. And it doesn’t take a big, dramatic exit. A little bit cumulatively over decades is sufficient to both be noticeable in the data and to reduce the amount of control that can be exercised.
To be clear, I certainly don’t think Matt is mistaking the (possibly) growing ranks of the self-employed for a growing number of entrepreneurs. I imagine that his take on this phenomenon and mine are very similar, with one potential source of tension.
As you can see in Isenberg’s statement above, one approach to a rising self-employed share of the population is to expand the safety net as a way of reducing the costs associated with self-employment. Securing medical insurance, navigating bureaucracy, etc., is difficult and expensive for self-employed individuals. I tend to think that there are other ways to reduce than burdens than to increase the size of transfers. A deeper issue, however, is that if self-employment is increasing as part of an effort to “innovate around the points of control” or, more crudely, to evade taxes, we face this interesting dilemma: the burdens on the safety net might increase as normative support for the safety net (i.e., the sense that one ought to play by the rules) erodes. Indeed, this doesn’t strike me as a terrible description of the status quo, which is one reason why I place such heavy emphasis on the importance of fostering more public sector efficiency. My sense is that this would actually enhance the legitimacy of the state while also lightening the burden of public sector spending.
Another obvious point is that a universe in which web-driven self-employment becomes a more prominent feature of the landscape is a universe in which the pressure for something like a VAT will likely increase, and the web platforms in question will themselves face growing compliance costs. This, as Eli suggests, might spark yet another wave of platform migration, to “black” sites that employ stronger forms of encryption or that make use of mesh networking. That is perhaps too dark a scenario. Regulators might choose to stick with light-touch regulation. One semi-promising example is the fact that officials in San Francisco have largely turned a blind eye to the transformation of homes into hotels, an effort to evade onerous rent control laws through the use of web platforms like Airbnb. Aaron Glantz had an excellent report on this a few months back. It turns out that the (until recently) revenue-starved local government was turning a blind eye to code violations because, well, the owners of the buildings were paying the hotel occupancy tax.
To put some sort of prescriptive button on this, I tend to think we should lower the barriers to employing people while also lowering the barriers to self-employment. So deregulation would be very high on my list of priorities — well above tax reform, even — for all the reasons Michael Mandel has outlined. But this isn’t to discount the value of lowering the barriers to self-employment, and indeed the value of fractional employment or crowdsourcing platforms like Mechanical Turk, which may grow in prominence.
By Reihan Salam
Originally posted in the National Review Online on March 9, 2012.